Download Module Long-run Economic Growth

Pump Primer:
• Define the “Rule of 70.”
37
Module 37
Long-run
Economic Growth
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
Biblical Integration:
• The believer should understand the
consequences of the trade-off between a
short-term and a long-term consequence
(the lost birthright; Gen.25:29- 34). We
know that it does not profit a man to gain
the world and lose his soul (Matt.16:26).
What you will learn
in this Module:
• How we measure long-run economic
growth
• How real GDP has changed over time
• How real GDP varies across countries
• The sources of long-run economic growth
• How productivity is driven by physical
capital, human capital, and technological
progress
Comparing Economies Across
Time and Space
How would you design a statistic to measure
the growth of a nation’s economy.
The measure must be trackable over time,
and must be applicable across nations, not
just ours.
Real GDP per Capita
The key statistic used to track economic growth is
real GDP per capita—real GDP divided by the
population size.
• GDP because, as we have learned, GDP
measures the total value of an economy’s
production of final goods and services as well
as the income earned in that economy in a
given year. Think of this as the total size of the
economic pie.
Real GDP per Capita
• Real GDP because we want to separate
changes in the quantity of goods and
services from the effects of a rising price
level. This is the size of the pie after adjusting
for inflation.
• Real GDP per capita because we want to
isolate the effect of changes in the
population. This gives us the size of each
person’s slice of the pie, if it were shared
equally.
Real GDP per Capita
For example, other things equal, an increase in
the population lowers the standard of living for
the average person—there are now more people
to share a given amount of real GDP. An
increase in real GDP that only matches an
increase in population leaves the average
standard of living unchanged.
Growth Rates
Growth rates are like compounded interest.
If the annual interest rate is 10% at the bank,
and you are saving $100, after year 1 you will
have $110, an increase of $10. After year two,
you will have $121, an additional increase of
$11.
If the economy grows by 2% one year, and
another 2% the following year, and another 2%
the year after that, these annual growth rates
are compounded into larger and larger
increases in per capital real GDP.
Growth Rates
Rule of 70 approximates how many years it will
take for the economy to double at a given rate
of economic growth.
# of years for a number to double = (70/annual
growth rate of that number)
Example If annual per capita real GDP increases at
5% every year, it will take approximately 14 years for
it to double.
The million dollar question is why some nations have
faster long-run economic growth than others.
The Sources of Long-Run
Growth
• Three words: Productivity,
productivity, productivity
The Crucial Importance of
Productivity
The authors stress: Sustained growth in real GDP per
capita occurs only when the amount of output
produced by the average worker increases steadily.
Labor productivity = (real GDP/# of people working)
If workers are creating more output, on average, the
size of the economic pie will be rising and the
average person’s slice will also be rising.
What factors lead to higher productivity?
The Crucial Importance of
Productivity
1. Physical Capital
If you give a worker more physical capital (tools) with
which to do the work, he/she will almost always be
more productive.
A carpenter with a hydraulic nail gun will build more
houses in a year, than a carpenter with a claw
hammer.
A book keeper with a laptop computer and software
will create more financial statements in year than a
book keeper with a hand-held calculator?
The Crucial Importance of
Productivity
2. Human Capital
If a worker has more education and training, human
capital, he/she tends to be more productive.
As jobs and the global economy become more
complex, nations with a more highly educated
workforce will be able to produce more output per
worker than nations with a lower level of education.
Today nearly 30% of American workers have a college
degree. In 1910, only 3% had college degrees.
This significantly contributed to the growth of the U.S.
economy.
The Crucial Importance of
Productivity
3. Technology
We can think of technology as our collective body of
knowledge.
How do we know how to build a satellite that will orbit
the earth and tell me how to get from my hotel in
Washington, DC to the Lincoln Memorial?
It takes years and years of collective learning to build
such useful devices as GPS systems.
The Crucial Importance of
Productivity
These innovations, and many others large and
small, are major factors in allowing an average
worker to increase his/her output in a given year.
So, if you give a worker more tools, better tools,
and the education and training to know what to do
with them, that worker will be more productive.
Household Production:
• Make a list of the production that happens
in the home and community.
• Make a list of the physical capital and
technology that allows the household to be
more productive.
Household Production:
The physical capital and technology in the
household increases each member’s
productivity. The same is true of the
increased productivity in the workplace and
nation.